IEEJ © July 2017. All Rights Reserved.

25 July 2017
The 426th Forum on Research Work

Economic and Energy Outlook of Japan through FY2018
Energy supply and demand structure significantly changes
AOSHIMA Momoko, Y. Yorita, M. Tsunoda, H. Arimoto, C. Onda, Y. Shibata, A. Yanagisawa,
S. Suehiro, K. Taguchi and K. ItoHighlights
Macro economy | Japanese economy through FY2018 grows by more than
1.0% for four consecutive years
Firm growth in both domestic and foreign demand in FY2017 supports the expansion of the Japanese
economy by 1.4%. Although the export expansion will slow down in FY2018, a strong domestic demand
will maintain a GDP growth of 1.1% for that period. The Japanese economy will experience over 1.0%
growth for four consecutive years for the first time since FY2003 to FY2007.

Primary energy consumption | Total primary energy consumption declines
mainly because of decreasing use of fossil fuels. Japan’s self-sufficiency ratio
exceeds 10% for the first time since the Great East Japan Earthquake.
In spite of expanding economic activities, total primary energy consumption in FY2017 slightly
decreases by 0.1% due to continued energy conservation efforts. Primary energy consumption inFY2018 will decline by 0.6% from the preceding year; the stronger decrease reflects lower growth ineconomic activities. Fossil fuels consumption will decrease by 17 Mtoe for the projected years with therestart of nuclear power plants and increased generation from renewable energy. Energy-related CO2
emissions reached their highest level in FY2013 and have been continuously decreasing ever since(FY2017: -2.0%, FY2018: -1.6%). Japan’s self-sufficiency ratio exceeds 10% for the first time since theGreat East Japan Earthquake.

Energy sales | Electricity increases and city gas continues at historical highlevels, while fuel oil declines.
In FY2017, electricity sales increase mainly due to rising sales to industry associated with the expanded
production activities. In FY2018, electricity sales will remain almost flat (FY2017: 0.4%, FY2018: 0.0%).
City gas sales reach record high levels for the third consecutive year, mainly because of rising sales togeneral industry due to the production/economic activities and exploiting new demand (FY2017: 1.0%,FY2018: 0.6%). In FY2017, total fuel oil sales decline by 1.6% due to less heavy fuel oil C required forpower generation caused by the return of nuclear power plants and fuel switching. In FY2018, fuel oilsales will continue to decline (-1.7%), reaching levels below 70% of their peak.

Nuclear power generation | 10 nuclear power plants are assumed to restartby the end of FY2018, decreasing the electricity unit cost by JPY300/MWh.
A total of five nuclear power plants are now operating in Japan with units 3 and 4 of the Takahama
nuclear power station restarting operation. Another seven units have already met the new regulation
standards and are being prepared for re-operation. If a total of 10 units are in operations by the end ofFY2018, total spending on fossil fuel imports would decrease by JPY500 billion compared to the casewhere none of the units are in operation. With 10 units in operations (compared to none), real GDP
expands by JPY500 billion, the self-sufficiency ratio increases by 2.9 point and energy-related CO2Economic and Energy Outlook of Japan through FY2018|1IEEJ © July 2017. All Rights Reserved.

emissions decline by 2.7%. Nuclear power generation clearly contributes to the improvement of the 3Es(economy, energy security, and environment).

In-depth analysis | Demand trend of diesel oil
Among fuel oils, demand for diesel oil is the third largest after gasoline and naphtha; it is consumed in awide range of fields. Diesel oil is also the only major fuel oil that increased in consumption compared toFY2010, the year before the Great East Japan Earthquake. It is now declining through FY2018 but at
more moderate pace compared to other fuel oils (FY2017: -0.6%, FY2018: -0.6%). The share of diesel oil
in total fuel oil sales expands from 16.8% in FY2010 to 19.3% in FY2018.

Executive summary of outlook through FY2018 [Reference Scenario]
Macro economy
The Japanese economy will grow at 1.4% in FY2017 because of favourable private consumption expenditureand strong exports supported by overseas economic growth. Despite a slowdown in exports in FY2018, theeconomy will continue to grow at 1.1% due to firm growth in domestic demand greatly influenced by Tokyo
Olympic Games-related investment. Although growth keeps over 1% for four consecutive years throughFY2018, it seems to be far from the Government’s target of a nominal GDP of JPY600 trillion.

Production activities
Since the exports of electric machinery grow alongside with the moderate restoration of overseas economy,
the significant recovery of general and electric machinery production has a huge contributing factor to theoverall production activities in FY2017. Also, the urban redevelopment and infrastructure construction for
the Tokyo Olympics are among the contributing factors to the overall production activities. Production
activities continue to enlarge in FY2018, although at a more moderate pace than the preceding year.
Ethylene production declines as maintenance of plants increases relative to the previous year and as thecompetition for exports to China intensifies due to the operation of shale-derived ethylene plants in theUnited States.

Energy supply and demand
Although production and economic activities are growing, total primary energy supply in FY2017 declines
slightly by 0.1% because of the continued advancement of energy efficiency. In FY2018, it decreases a little
more (-0.6%) caused by more moderate production and economic growth than in the previous year. Oil
dependence ratio falls to below 40% in FY2017, and the shift toward non-fossil fuels energy will continue toprogress.
In FY2017, total final energy consumption in the industry sector increases slightly owing to expanded
production activities (0.1%). The transport sector consumes less than in the previous year (-1.1%) due to anincrease in the share of fuel-efficient cars. Consumption also decreases in the buildings sector (residentialand commercial) mainly due to improvements in energy efficiency (-0.7%). Although overall production
activities increase in FY2018, energy consumption in all sectors decreases. The industry sector’s consumption
decreases by 0.5% from the previous year, due to a consumption drop in naphtha for the petrochemicalindustry. Consumption in the buildings and transport sectors declines due to further advancements ofenergy efficiency (buildings: -0.8%, transport: -1.1%).

Energy sales
In FY2017, electricity sales augment slightly (0.4%), because increased sales to industry (0.8%) for theexpanded production activities surpass the decreased sales for lighting contract and low voltage due to theimprovement of energy efficiency. In FY2018, the total electricity sales remain flat as the increase of electricity

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sales for industry (high and extra-high voltage) slows down (0.3%), in line with the production activities
moderate growth, while low voltage sales decrease because of facilities’ efficiency improvement (-1.1%).
Total city gas sales reach a record high level in FY2017. They increase by 1.0%, led by growing sales togeneral industry (2.1%) that continuously seeks demand development activities. Sales for domestic use
increase by 0.2% also because of the constant demand development. Sales for commercial and other uses
drop by 0.4% because of the diffusion of more energy-efficient equipments. In FY2018, overall sales willreach the highest record for a third conservative year. Sales will rise moderately compared to the previousyear (0.6%), led by increase sales for industrial use, while sales for domestic use will remain flat and those forcommercial and other uses decline.
In FY2017, fuel oil sales decrease for the fifth consecutive year. The decrease of 1.6% in FY2017 is caused bya huge decline in the use of heavy fuel oil C for power generation (due to the return of nuclear powerplants) and a decline in sales of kerosene and heavy fuel oil A, B and C because of fuel switching toward
electricity and city gas. In FY2018, sales of all fuel oils will be lower by 1.7% than the previous year for thesixth consecutive year. Naphtha for the petrochemical industry turns to the decrease.

Renewable power generation
With regard to renewable power generation, a rapid increase in approved capacity under the FIT program
seems suppressed by a fall in the electricity price for solar PV and the cancellation of previously approved
capacities but non-operated. If the expired capacities were excluded from the approved 94.6 GW capacity atthe end of February 2017, 66.9 GW would be operated. In this case, the cumulative amount of consumer
burden for twenty years will reach JYP45 trillion (including capacities which were introduced before FIT andincluded in FIT later). This is equivalent to a rise in electricity price of JPY2,600/MWh – 11% for the residential
and 16% for the industry sector.

CO2 emissions
Energy-related CO2 emissions, which reached a historical high in FY2013, will decrease for a fifth consecutive
year through FY2018. Energy efficiency, the restart of nuclear power plants as well as an increase inrenewable energy will lower the emission to 1,113 Mt-CO2 in FY2017 and 1,096 Mt-CO2 in FY2018 (9.9% and11.3% less than in FY2013, respectively). FY2018 will be below 1,100 Mt-CO2 for the first time in 25 years,except for FY2009 just after the Lehman shock.

Economic and Energy Outlook of Japan through FY2018|3IEEJ © July 2017. All Rights Reserved.

Table 1 | Summary of the Reference Scenario
Historical
Projections
Year-to-year changes
FY2010 FY2014 FY2015 FY2016 FY2017 FY2018 FY2016 FY2017 FY2018

514.7 473.9 467.0
232.3 217.1 211.7
Oil (GL)
73.3
90.586.0
Natural gas2 (Mt of LNG equiv.)
LNG imports (Mt)
70.6
89.1
83.6
184.7 190.0 190.2
Coal2 (Mt)
Nuclear (TWh)
288.2
0.0
9.4
Hydro (TWh)
84.3
83.8
87.4
63.9
87.6
99.7
Other renewables3 (TWh)4Final energy consumption (Mtoe) 342.1 315.9 311.4
159.3 149.2 147.2
Industry5
Buildings
100.2
89.9
87.2
Transport
82.5
76.8
76.9
Petroleum products
177.6 159.4 158.9
Natural gas and city gas
34.5
34.6
34.1
Coal and coal products
36.7
36.0
33.7
Electricity
89.8
82.7
81.6
6(926.6) (851.4) (837.5)
Electricity sales (TWh)73
39.28 40.16 39.91
City gas sales (Billion m )Fuel oil sales (GL)
196.0 182.7 180.5
4Energy-related CO2 emissions (Mt) 1,139 1,189 1,149(FY2013=100)
92.2
96.3
93.0
Crude oil, import, CIF ($/bbl)
84
89
49
LNG, import, CIF ($/t)
584
797452($/MBtu)
11.3
15.3
8.7
Steam coal, import, CIF ($/t)
114
9376
Coking coal, import, CIF ($/t)
175
109
88
Nominal GDP (JPY trillion)
499.2 517.7 531.8
Real GDP (JPY2011 trillion)
492.8 510.3 516.6
Industrial production (CY2010=100)
99.4
98.4
97.5
Exchange rate (JPY/$)
86.1 109.2 120.4
Primary energy supply (Mtoe)1

EconomyPricesEnergy

2

465.6
205.4
88.1
84.7
188.0
18.1
80.1
109.7
311.4
146.6
88.7
76.1
156.5
35.1
33.6
83.1
853.9
41.53
176.8
1,136
92.0
48
363
7.0
81
110
537.5
523.0
98.6
108.4

465.4
198.3
85.3
82.1
188.2
55.6
80.1
118.9
309.9
146.7
88.0
75.2
154.1
35.5
33.9
83.4
857.7
41.93
173.9
1,113
90.1
51399
7.7
93
121545.1
530.5101.1
114.8

462.4 -0.3%
193.0 -2.9%
83.4 2.5%
80.3 1.4%
188.8 -1.1%
65.6
91%
80.1 -8.4%
127.3 10.1%
307.6 0.0%
145.9 -0.4%
87.3 1.7%
74.3 -1.1%
151.3 -1.5%
35.7 3.1%
34.1 -0.3%
83.4 1.8%
857.7
n.a.
42.19 4.1%
171.0 -2.1%
1,096 -1.1%
88.7..
52 -2.5%
395 -19.8%
7.6..
87 6.8%101 25.8%
553.4 1.1%
536.6 1.2%
102.5 1.2%
115.0 -9.9%-0.1% -0.6%-3.5% -2.7%-3.2% -2.2%-3.1% -2.3%
0.1% 0.3%
208% 17.9%
0.0% 0.0%
8.3% 7.1%-0.5% -0.8%
0.1% -0.5%-0.7% -0.8%-1.1% -1.2%-1.6% -1.8%
1.1% 0.6%
0.9% 0.6%
0.4% 0.0%
0.4% 0.0%
1.0% 0.6%-1.6% -1.7%-2.0% -1.6%..
..
7.2% 0.8%
10.0% -1.0%..
..
14.7% -6.5%
9.7% -16.9%
1.4% 1.5%
1.4% 1.1%
2.6% 1.3%
5.8% 0.2%

Notes:
1. Mtoe = 1013 kcal
2. Conversion factors for Oil: 9,126 kcal/L; Natural gas: 13,043 kcal/kg; Steam coal: 6,139 kcal/kg; Coking coal: 6,928 kcal/kg until FY2012.
2. Conversion factors for Oil: 9,145 kcal/L; Natural gas: 13,141 kcal/kg; Steam coal: 6,203 kcal/kg; Coking coal: 6,877 kcal/kg since FY2013.
3. Excluding large hydro 30 MW or more
4. Estimated actual value for fiscal 2016
5. Industry includes non-energy use.
6. Figures in parentheses are old statistical figures.
7. Conversion factor: 1 m3 = 10,000 kcal

Executive summary of topics
Effect of the nuclear power plants’ restart
The Reference Scenario assumes that five more power plants will restart by the end of FY2018 in addition tothe currently operating five plants, for a total of 10. Electricity generation from nuclear will reach 65.6 TWh,which represents a 7% share of the power generation mix. Electricity unit cost should decrease by
JPY300/MWh compared to the Zero Operation Case, which assumes none of the nuclear power plants is in

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operations. Relative to the Zero Operation Case, total spending on fossil fuel imports decreases byJPY500 billion, real GDP and self-sufficiency ratio expand by JPY500 billion and by 2.9 point respectively, andenergy-related CO2 emissions decline by 30 Mt (2.7%).
In the Low Case, which assumes no new plants to restart by the end of FY2018, total electricity generationfrom nuclear is almost half of the Reference Scenario with a 3% share of the power generation mix. The
contribution to the 3Es (economy, energy security, and environment) is also half of the Reference Scenario.
On the other hand, the High Case assumes a total of 17 nuclear power plants to be in operation by the endof FY2018 with electricity generation from nuclear reaching 1.5 times of Reference Scenario level. The High
Case represents a 10% share of the power generation mix, which is almost half of the share of 20% to 22%
prospected in METI’s Long-term Energy Supply and Demand Outlook. Relative to the Zero Operation Case,electricity unit cost decreases by JPY500/MWh, and total spending on fossil fuel imports decline by
JPY700 billion. Real GDP and self-sufficiency ratio expand by JPY800 billion and by 4.4 point respectively,
while energy-related CO2 emissions decline by 45 Mt (4.0%). The pace of restarting nuclear power plants has
a definite impact on the improvement of the 3Es.
Figure 1 | Effect of the nuclear power plants’ restart [FY2018, compared with the Zero Operation Case]120(10%)99

00.0-100
(7%)
66

80

40(3%)
32-200-300-0.2-144-500

Nuclear power
generation(TWh)

0.6-0.4-453

Electricity unitcost(JPY/MWh)

0.5

2.9

2-0.8Total spending
on fossil fuelimports(JPY trillion)
Low Case

0.2

10.0

Reference Scenario

-15

-30

-400Real GDP(JPY2011 trillion)

-20
-30

1.4

0.2

-0.7

0-10

3

0.4

-0.5

-0.6

-299

4.4

4-0.2

-400
0

5

0.8

0.8

-50

Self-sufficiency
rate (%)-45

CO2 emissions(Mt-CO2)High Case

Note: Figures in parentheses are nuclear’s share in power generation mix.

If we try to achieve lower spending on fossil fuel imports (JPY700 billion) and CO2 emissions (45 Mt) as in theHigh Case by only electricity saving, a reduction of 100 TWh (equivalent to the decrease of electricity
generation from FY2010 to FY2014) would be required. It, however, would be very difficult to reduce theelectricity unit cost or increase the self-sufficiency ratio using electricity savings alone.

In-depth analysis <1> Demand trend of diesel oil
Diesel oil sales, which are relatively firm among fuel oils, decline at a rate of 0.6% per year during the period
in review, while total fuel oils sales decrease by 1.7% per year. Diesel oil sales for transportation account forover 80% of total sales. Diesel oil use for freight among transportation decreases at an annual rate of 0.9%,
far less than the decreasing pace for FY2016 of 1.4%. The advancement of fuel economy and energy savingsin the transportation system are continuously acting as decreasing factors. On the other hand, the increaseof home delivery service associated with expanded internet shopping and related demand for truck
transportation are also important determinants of diesel oil demand. The number of home delivery service
operation in FY2016 increased by 7% from the previous year, and is expected to grow through FY2018.
These ease the pace of decreasing the volume of diesel oil sales.

Contact: report@tky.ieej.or.jp
Economic and Energy Outlook of Japan through FY2018|5